2013 (1) TMI 977 - AT - Income Tax

Summary

Issues involved:
The only issue in this appeal is the addition u/s.40A(2)(b) of Rs. 42,112/- for alleged excessive payment of interest by 3%.

Details of the Judgment:

Issue 1: Addition u/s.40A(2)(b) of Rs. 42,112/- for alleged excessive payment of interest by 3%

The assessee appealed against the order of the CIT(A)-XXI, dated 14.5.2010, regarding the addition under Section 40A(2)(b) of Rs. 42,112 for alleged excessive payment of interest by 3%. The counsel for the assessee argued that interest was paid at 15% per annum to creditors, while the Revenue allowed interest at 12% and added back the 3% difference under Section 40A(2)(b) of the Act. It was contended that the interest paid at 15% to two coparceners of the assessee-HUF was not excessive. The AO and CIT(A) supported the disallowance.

Upon review, it was observed that the disallowance was based solely on the interest paid to two coparceners at 15%, compared to 12% paid to other parties. Considering the prevailing interest rates during the relevant assessment year 2007-2008, the 15% interest to coparceners was deemed reasonable. The loans from coparceners were considered reliable, with a lower likelihood of immediate repayment and higher confidentiality. Consequently, it was concluded that invoking Section 40A(2)(b) was incorrect in this case. Thus, the addition of Rs. 42,112 was deleted, and the appeal of the assessee was allowed.

In conclusion, the appeal of the assessee was allowed, and the addition under Section 40A(2)(b) was deemed unwarranted.